An Agent’s Main Challenge – Getting Your Product Right

An Agent’s Main Challenge – Getting Your Product Right 

With high profile real estate casualties continuing to occur on a regular basis, talk amongst professionals in the investment segment of the market is that finding the right product to sell is getting increasingly, almost impossibly difficult. 

Investors are becoming both battle-weary and battle hardened breeding a cynicism that is, in turn, leading to more questions and more objections of those who make a living from selling property as an investment. And there is little doubt that these questions are becoming much harder to answer in any satisfactory way. 

Whilst that cynicism is unquestionably very healthy on so many levels the reality is that we may be witnessing the beginning of the end of high yield investments and that will mean an industry needing to adapt to survive or people leaving the sector completely. Conventional wisdom now tells us, after so many bruising encounters with snazzy looking deals that end up with the staying power of a chocolate teapot, that high yield plus high commission equals low chances of success. Expectations from both buyer and seller might need a fairly radical overhaul. This process seems to have already started but where will it end? 

Before continuing, I suppose that we need to understand what actually constitutes a high yield investment as one man’s 10% student accommodation yield might be as (scarily?) high as the next man’s 3% Central London returns or the next man’s Florida land plots or Thailand resorts. The easiest definition I can think of is an investment where the agent or developer chooses to state a yield in their marketing copy, or in other words, a yield that they are proud of. 

As high yield investments become increasingly scarce what now seems to be happening is that agents are polarising around relatively few projects from relatively few suppliers. In turn, that leads to its own problems as lead sources are finite so we end up with the same advertisers marketing to the same clients with the same product. This, in turn, increases the cost per lead and reduces the viability for the seller. Plus who wants to sell the same as everyone else? What it also does, in certain cases, is encourage sellers to make claims that are perhaps more bold and less deliverable than their competitors. 

Roman Carel, Owner of fast growing agent innovators Athena Advisors, doesn’t seem to be worried. Focusing on France and Portugal Athena cares more about the lifestyle end of investment and it is a formula that is working really well. Carel says: “We focus on lifestyle with an investment purpose. Every second home or third home, is still an investment, yet it’s about lifestyle. Finding the right balance in our new build property development, foreseeing the local development and societal trend is a must in the way we choose our product”. He also has a refreshingly conservative approach to commissions which seems very tomorrow rather than yesterday amongst agents and continues: “Commission is not at all important, as it’s about finding what is appealing. You get compensated by volume of sales. Our strategy is to work with a margin of 3%”. When commissions can be as high as 20, even 25%, on some investments that seems like a more prudent way to go. 

Paul Mahoney, Nova Financial MD, based in Central London believes that commissions are consideration but that there is always a quality of product v earnings level balance that needs to be carefully adhered to. He explains: “When a property ticks all of our due diligence criteria there tends to be under strong demand from the market and hence developers do not have the need to pay high commissions. We are strongly against exorbitant commissions to sell lower quality properties as this results in a strong conflict of interest and often bias on the advisor’s/agent’s part. We believe that developers & vendors should pay a fair commission that will not impact upon the market value of the property and should at all times be fully disclosed to the buyer”. 

He has some pretty clear ideas of how that due diligence should take place too. 

“We conduct due diligence (DD) in a range of areas such as the market, the development and the developer. When it comes to the market we look very closely at the supply and demand equation and seek a lack of supply and a growing sustainable demand. Population growth is often the main driver of demand but can be sporadic in some areas so sustainability is key. Next we look at socio-economic levels of the target market from both a rental and resale perspective as this will impact returns and finally we review current and proposed infrastructure”. 

Mahoney continues: “In conducting due diligence on the development; we like landmark projects that make a statement in an area as they will attract the right type of tenant and future buyer but it is also important for them to be priced relevant to the market. We are adverse to the term below market value (BMV) as we believe it is a misnomer when it comes to property prices as they are determined by the supply of and demand for an asset. If that asset is selling for what is perceived as BMV then there is either a lack of demand or an oversupply. We believe our clients should pay fair value for an asset that is under strong demand for all the right reasons and not be afraid to pay slightly more to achieve better value for money”. 

On the developer itself Mahoney is clear: “when it comes to new and off plan properties this is just important if not more important than the other areas of DD. We go into depth on understanding a developers track record, their finance structures (where is their money coming from and do the JV etc), whether they own the land and have planning permissions etc. some developers don’t like these questions but if that is the case we will not do business with them as we cannot gain the peace of mind that we and our clients require to invest”. 

One interesting and inevitable change over the last few years has been the internationalisation of the market. UK investments are being lapped up, of course, in South East Asia, China, the Middle East and beyond but there are equally exciting channels from China to Australia, Brazil to the US and many more. Whilst the pool of clients might seem large, the ease with which people can communicate online means that negative stories can travel across whole markets in seconds and minutes. Even more reason to ensure that those vital due diligence steps are adhered to. 

Speaking of the power of online we asked both people whether their view of a developer or project would be affected by negative blogs. Carel and Mahony disagree. 

In response to whether Carel could be put off once Athena had conducted due diligence he said: “No way. We are not opportunist but rather believers in what we promote. We tend to invest with developers as well, to have our skin in the game”. 

Mahoney, on the other hand, felt that attention should be paid to comments online under certain circumstances. 

“This would depend on the comment as to whether we would look into it further however given the open source nature of forums it would need to be something fairly damning for us to take it into account as we are very confident in the depth of DD that we conduct on each and every property prior to a recommendation to our clients. We would rarely take positive due diligence from a forum into account as it could quite possible be self-promotion”. 

Others are equally robust in their due diligence. Savills have an extremely in depth check list that they go through before getting involved. Charles Weston Baker, Head of International at the agency, is adamant that the “biggest mistake an agency can make is not doing enough at the due diligence stage”. It is becoming increasingly apparent that the agent can no longer hide behind the developer if lawyers come knocking. Agents simply have to be able to show in depth research into the product they are selling. As you might expect from one of the industry’s leading legal figures, Stefano Lucatello at Kobalt Law, his advice is that you should invest in rigorous due diligence and has pages of questions an agent should answer when studying a product to sell. His points range from the punchy “kick it – if it hurts it exists” through to “scrutinise the marketing materials and pay particular attention to anything that could be seen to be misrepresentation”. Other advice includes studying the rules on distance selling, internet sales and more. New legislation came into play last June governing what you can and can’t do when it comes to distance selling and Lucatello suggests that most companies are not up to speed but need to be. 

Once agents have applied their strict or less strict code to due diligence, established that the product is commercially attractive, that it is secure, that the world and his wife isn’t selling it already and that it pays sufficient commission to be worth promoting in the first place then you are good to go but if it doesn’t tick the above boxes it won’t be worth starting. There are no short cuts as the industry is now only too aware of. 

The chances are that we are going to see lower commissions and lower promoted yields in the future and that there will be more regulation on what you can and can’t say in advertising copy and sales pitches. If these changes come at the same time as better managed expectations amongst consumers then the property trade can face the future with hope rather than fear. If that means that get rich quick schemes become get a bit less rich a bit slower ones then that is a small price to pay for a solid industry future.